Thursday, December 27, 2012

The yen lost its status as a "safe haven" currency

As discussed earlier, the yen is no longer acting as a "safe haven" or "risk-off" currency. This is difficult for some in the FX community to accept, but it's the new reality. The recent drop in the US equity market coincided with declines in the yen. In the past the yen would typically move in the opposite direction of the "risk-on" assets such as equities and commodities, but that relationship no longer holds.

S&P500 futures
(the big drop is the Republican rejection of the Boehner proposal)

Yen per one dollar (yen weakening)

Much of this is driven by Japan's fundamentals. The new government will ride the Bank of Japan (BOJ) to make sure it ramps up QE to unprecedented levels. The goal is to "print" so much yen that inflation rises from negative levels (where it is currently - chart to the left) to some fixed positive target such as 2%. Any semblance of independence BOJ had is now gone.

The Telegraph: - Mr Abe has said that he will pick someone who agrees with his views on the need for bolder monetary easing to succeed governor Masaaki Shirakawa when his term expires in April next year.

"At this month's policy meeting, the BoJ said it would examine (setting an inflation target) at its next meeting" in January, he said on television on Sunday.

The strategy may in fact help Japan's exporters in the long run, as the weaker yen makes their goods cheaper. For now however the fundamentals remain weak and the traditional relationship between global risk assets and the yen no longer holds.